Stock Review: Godrej Consumer Products

Though declining sales in soaps business was a major contributor for the disappointing standalone performance in the September quarter, analysts expect a bounce back in the second half of 2010-2011 due to price rise (about 3 per cent), last year's lower base and lower food inflation going forward. However, the impact of higher palm oil prices, a key raw material in soaps, on profitability is to be monitored.

More, analysts believe investors should not worry too much about the relatively muted growth expected in soaps as the industry is more mature with high penetration levels. Its contribution in Godrej Consumer Products (GCPL's) consolidated revenues is expected to decline over the next few years from the current 22 per cent.

Meanwhile, the company is doing well in relatively less competitive hair colours (13 per cent of overall sales) and home insecticides (30 per cent); thanks to its market leadership. Revenues of both the businesses grew by 21 per cent and 38 per cent, respectively in the second quarter with stable operating profit margins.

The company derives over 40 per cent of its domestic revenues from rural markets, which can grow faster as penetration increases. The fear about competition from global players in hair colours is overdone as they are mostly in the premium category, is just 10 per cent of the overall market.

Analysts feel the change in GCPL's business model from being a predominantly soaps to a multi-product company with presence in several geographies will yield results over the long term. However, there are concerns of integration, currency fluctuations and relatively high debt compared with other FMCG players.

While GCPL is doing well in Indonesia, the growth of its businesses in Africa, South America and the UK (accounting for 16 per cent of consolidated revenues) has not been encouraging. With a positive outlook in most business segments, the GCPL stock trades at a reasonable valuation of 22 times 2010-2011 average estimated earnings. On Friday, the stock jumped about 5 per cent.